A brief period of US dollar weakness late last week came to an abrupt end on Friday, when new polls on the US presidential election suggested a significantly increased likelihood of a victory for Donald Trump. A Trump victory is probably the central scenario for most market participants by now, Commerzbank’s FX analyst Head of FX and Commodity Research Ulrich Leuchtmann notes.
Currency market is ignoring the risk of Trump-dependent Fed
“A strong dollar is not a value judgment on current or future US policy — not even on US economic policy. Nevertheless, the US import tariffs cause the US dollar to trade stronger than it would without them. The US tariffs give goods produced in the US an advantage over goods from the rest of the world: the former can be sold in the US without tariff surcharges. But because the USD exchange rates are largely responsible for the relative price between US goods and goods from the rest of the world, exchange rates must adjust to reflect this advantage.”
“Trump has repeatedly made it clear that he believes he can make better monetary policy decisions than the experts on the Board of Governors and the FOMC. This populist hubris is what sets him apart from his rival for the presidency and, in my view, makes him a greater threat to Fed independence than any president before him. Some of them occasionally wanted to influence the Fed, albeit only for purely tactical reasons.
“If the Fed were to have to ask Trump for permission to raise interest rates, higher inflationary pressure in the US would no longer be a USD-positive argument, but rather a USD-negative one. The effects of tariffs on USD exchange rates would be reversed. The currency market is currently ignoring this risk.”
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